Academy Sports and Outdoors, Inc.'s (NASDAQ:ASO) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 28% over the past three months, it is easy to disregard Academy Sports and Outdoors (NASDAQ:ASO). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Academy Sports and Outdoors' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Academy Sports and Outdoors

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Academy Sports and Outdoors is:

26% = US$502m ÷ US$1.9b (Based on the trailing twelve months to May 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.26 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Academy Sports and Outdoors' Earnings Growth And 26% ROE

To begin with, Academy Sports and Outdoors has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 19% which is quite remarkable. So, the substantial 21% net income growth seen by Academy Sports and Outdoors over the past five years isn't overly surprising.

As a next step, we compared Academy Sports and Outdoors' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 23% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Academy Sports and Outdoors fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Academy Sports and Outdoors Efficiently Re-investing Its Profits?

Academy Sports and Outdoors has a really low three-year median payout ratio of 4.3%, meaning that it has the remaining 96% left over to reinvest into its business. So it looks like Academy Sports and Outdoors is reinvesting profits heavily to grow its business, which shows in its earnings growth.

While Academy Sports and Outdoors has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 11% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 20%) over the same period.

Conclusion

On the whole, we feel that Academy Sports and Outdoors' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com